The energy policy world was abuzz during early 2015 over the potential impact of a landmark proceeding at the New York State Public Service Commission. Utilities, State Utility Commissions, consumer advocates, and others were awaiting a key order in New York State’s “Reforming the Energy Vision.” On February 26, 2015, the New York State Public Service Commission delivered their long awaited order adopting a regulatory Policy Framework and Implementation Plan. This post will summarize key directives delivered via the order, as well as convey insights associated with its impact on the Energy Efficiency Landscape.
For a bulleted outline of the order itself, see here.
Why the Need for Reform?
Before jumping into the Order itself, some context may be helpful. It’s worth noting that New York’s proceeding certainly isn’t happening in a vacuum. Discussions around the “Utility of the Future” and regulatory reform have been happening throughout the industry for quite some time now, especially in markets like Hawaii and California, where high energy prices combine with the PV/Energy Storage combination to make load defection—the idea that consumers will drastically reduce their need to use kWh supplied by centralized generation assets—a reality. As such, forward thinking regulators in states such as Massachusetts, California, and Hawaii are actively trying to reshape the regulatory paradigm in a way that accounts for the pending proliferation of distributed energy resources, the associated bi-directional grid, and associated load reductions.
New York deserves commendation for their embrace of these important questions facing regulators. Indeed, as the financial capital of the world, New York regulators and utilities likely take notice when banks like Barclays, and Goldman Sachs, and Citigroup all express concerns for utility investments which don’t account for the rapidly changing pace of the electric grid. This caution is especially pertinent considering it is common practice for large centralized utility investments to be amortized over a period of 20 years or more. Below is a graph excerpted from the Rocky Mountain Institute’s “Economics of Load Defection” summarizing their prediction of load defection in the Northeast at appreciable amounts as early as 15 years from today.
It’s important to note that the above chart denotes load defection rather than grid defection; the grid will continue to serve an important purpose far into the foreseeable future—but it will see less load. This is a challenging scenario for regulators tasked with ensuring grid reliability, especially when the 100-year-old utility business model assumes that demand for electric supply will still be around in 20 years to justify any investments in large centralized assets we make today. This scenario poses a number of questions which are directly relevant to the reliability of the electric grid in the near term, including:
Is it possible that large centralized assets utilities invest in today may cease to be “used and useful” before their planned amortization is complete?
If so, at what point does investment in said assets become imprudent, and therefore unrecoverable by utilities as a matter of law?
These are all challenging questions being faced by regulators in New York State other forward-thinking jurisdictions throughout the country.
How is REV Tackling these Challenges?
The Commission’s Order establishes a policy framework and outlines a number of strategies to tackle pending challenges and uncertainties that will affect the reliability of our electric grid moving forward. The most important of which is that it grants utilities the role of distributed system platform provider, in spite of calls by some that the role would best be served by an independent entity. Acting as “air traffic controller” of the distribution grid, the distributed service platform provider will utilize dynamic load management to reduce overall energy usage, balance load with supply, and focus on reduction of peak usage, where flattening the 100 hours of greatest peak demand would save ratepayers over $1.2 annually. As Distribution Service Platform Providers, the utilities will integrate Distributed Energy Resources (DERs) into system planning, but not be allowed to own DERs except in cases where:
- Project is sponsored for demonstration purposes
- Project is Energy storage integrated into the distribution grid
- Solicitation to procure DER from third parties failed/was more costly
- Project is targeted at low-to-moderate income customers where markets have failed to provide DER
DER Integration, Non-Wire Alternatives, and the Brooklyn-Queens Demand Management Project:
The purposeful and planned integration of DERs into utility system planning will be a shift from the business as usual scenario for most utilities, however, it’s not altogether unheard of. As described by NEEP’s recent report on Geotargeting, several utilities within the region have used energy efficiency and distributed energy resources to increase cost-effectiveness of system planning. In many cases, these projects are known as “non-wire alternatives” and can defer or negate the need for expensive centralized infrastructure build out.
One of the most commonly referenced non-wire alternative projects may be found in ConEdison’s Brooklyn-Queens Demand Management project (BQDM). Faced with high levels of load growth within the Brooklyn-Queens area, ConEdison was considering a $1 Billion investment in a new substation, transmission sub-feeders, and switching station. In place of this large centralized investment, ConEdison issued a Request for Information seeking proposals for innovative DSM solutions to provide transmission and distribution system load relief, and reduce generation capacity requirements.
After evaluating proposals, the utility was able to secure enough demand side management measures to defer the $1 billion substation build-out until 2026—utilizing only $200 million worth of ratepayer dollars. Whether such a station will be needed after 2026 remains an open question, but if one is to believe the above-mentioned load defection projections of the Rocky Mountain Institute, or the buzz around the recent launch of Tesla’s competitively priced storage options, large centralized infrastructure investments are looking like a less reliable spot on the monopoly board.
How Does REV Support Energy Efficiency as a Proven Resource Outside of Non-Wire Alternative Pilots?
It will be a true test of New York State’s leadership role on these issues to see whether energy efficiency goals are lost in the static associated with such a landmark proceeding.
In reaction to the Framework Order, NEEP, along with several other interested parties within the NY Clean Energy Organizations Collaborative, took part in the drafting of a Joint Letter to the Commission expressing concern for a lack of certainty surrounding the future of Energy Efficiency Program Implementation under the REV Framework. Focus areas of the letter included:
- Efficiency programs enable market transformation.
Current energy efficiency program implementation models serve to enable and transform markets, rather than the inhibitor of free market forces that the initial Order characterizes them as.
- Clarifying energy efficiency as a first order resource would facilitate market actors.
Markets for energy efficiency services would benefit from greater certainty than is provided by the three years of continued program funding guaranteed in the Order. Energy Efficiency should be clearly designated by the commission as a first order energy resource for inclusion within utility integrated resource planning, rather than designating it as a “floor” and running the risk that prescribed funding levels be treated as a ceiling.
- Target-setting ensures results.
In spite of a reputable, sizable body of knowledge showing that states with explicit efficiency savings targets have the greatest chance of capturing the most cost-effective savings, the REV Order neglects to set explicit targets for efficiency programs after their third year of implementation.
- Clarifying the Role of NYSERDA during the Transition would Provide Market Certainty.
The REV order notes that the utilities will “work in concert” with NYSERDA to achieve energy savings goals, and outlines a role for NYSERDA in Market Transformation and Low-Income programs, but does not clarify the disposition of the savings targets that would have been NYSERDA’s responsibility under the Energy Efficiency Portfolio Standard.
- Incentives are an Important Component of Market Transformation Strategies
The Rev Order repeatedly emphases the transition from rebates and incentives to market based strategies. However, it fails to recognize that incentives are a necessary tool on the path toward transforming markets. Incentives can be used to break down barriers when traditional market forces fail to reach a cost-effective opportunity for savings.
- Self-Direct Program Funding Clarifications are Necessary
The REV Order establishes a self-direct program for large commercial and industrial customers, but fails to clarify which customers clarify as “large” and lacks detail on how the program will be funded. System benefit charges (SBC) are the purse most often associated with a self-direct program, but in a post-REV New York where efficiency programs are funded through base rates rather than a SBC, the source of funding for such a program is unclear.
While the REV Policy Framework clearly reinforces some of energy efficiency’s benefits in terms of DSM-integrated system planning, it leaves a number of uncertainties as to how utilities’ energy efficiency goals will be implemented. Pending next steps by regulators and utilities in the coming months will be play a crucial role in whether energy efficiency is placed on equal footing with competing resources.
What happens next in New York?
Amongst other things, the REV Framework establishes a timeline for a number of other reports, plans, and proceedings. To say the least, it’s going to be an eventful summer at the New York State Public Service Commission. A few key deadlines are included below, along with a brief explanation of their importance. Keep in mind though that, as the Order notes, that “the implementation of REV will require constant oversight and adjustments to implementation schedules and policies”.
- June 1, 2015- Staff Issues Benefit Cost framework
The REV Order discusses continued support for the widely accepted Total Resource Cost (TRC) test for cost-effectiveness screening, but also leaves open the opportunity for its revision, overhaul, or rejection in the future. The pending re-examination of the benefit cost framework affords staff the opportunity to better include societal impacts, such as externalities related to the environment, health, safety, and comfort within their evaluation of cost effectiveness. The Order explicitly identifies compliance with the EPA’s pending 111(d) promulgation as an important consideration for cost effectiveness. It also declares that cost effectiveness will be judged at the portfolio level, rather than the portfolio level. Outside of energy efficiency, the benefit-cost framework will also analyze utility infrastructure investments and DER procurements.
- June 1, 2015- Utilities File Technical Reference Manual (TRM) Management Plan
The Order directs utilities to, in concert, maintain their own planning, evaluation, TRM, and benefit-cost analysis tools, which are preferably uniform throughout the state with unique inputs from each distribution utility. Development and adoption of new cost savings algorithms and assumptions will be an integral part of this process.
- June 8, 2015- NYSERDA issues Clean Energy Fund Information Supplement
Building upon their September 2014 Straw Proposal, NYSERDA will submit their Clean Energy Fund information supplement to incorporate stakeholder feedback, the REV Framework Order, and a pending large scale renewables options paper into their new Clean Energy Fund proposal. As far as energy efficiency programs are concerned NYSERDA will lead market transformation efforts, as well as more traditional resource acquisition efforts in the low income market moving forward.
- July 1, 2015- Staff Issues Straw Proposal for Track Two Ratemaking Issues
Staff’s Track Two Proposal and the subsequent order is arguably the most important portion of the proceeding that has yet to be decided; it’s where the regulatory rubber hits the road. Performance based ratemaking reforms, the true value of distributed energy resources, temporal/locational/attribute-based pricing are all up discussion in Track II.
- July 1, 2015- Market Design Platform Technology Working Group Report Out
The Market Design Platform Technology Working Group is the decision-maker regarding what technologies and strategies will drive efforts to animate markets via the distributed system platform. The group is led by the NYS Department of Public Service, the Rocky Mountain Institute, and the New York Smart Grid Consortium.
- July 15, 2015- Utilities file their ETIPS
ETIPs are the REV equivalent of what’s typically referred to as an efficiency program administrator’s program plan. The ETIPs will transition funding for energy efficiency from the traditional SBC funds (et.al), and instead provide cost recovery for energy efficiency measure implementation with each distribution utility’s base rates. ETIPS will be judged at the portfolio level.
- August 3, 2015- Staff issues Guidance for Distributed System Implementation Plans (DSIP)
The REV order seeks to have utilities play a role in designing the distributed system platform (DSP) for managing distributed energy resources. The order describes the DSP as an intelligent network platform that fosters broad market activity that by enabling active customer participation and third party engagement in alignment with the wholesale market and bulk power system. Incumbent utilities will act in concert to serve as the interface platform connecting customers, DER aggregators, and the distribution system. The DSIP guidance will provide providers with a better understanding of how to building and maintain DSP functions.
- January 15, 2015- Utilities file DSIPS
As mentioned above, the DSIPs will describe the utilities’ plan to take on the role of distributed system platform (DSP) provider. The DSIP Plans will include actual and forecast loads; major capital and spending projects; actual and forecast levels of DER; plans for encouraging the development of DER; plans for encouraging DER in underserved markets; specific plans and cost estimates for building DSP capabilities; a description of internal organization of DSP and traditional utility functions.
- February 1, 2015- Staff files REV Energy Efficiency Best Practices Guide
The Order Directs staff to publish a best practices guide to ensure shared learning and the evolution of programs across service territories. This document will likely also serve as guidance for neighboring states contemplating similar actions.
We applaud the efforts of regulators in New York State to proactively reform a regulatory compact that has worked well for more than 100 years, but is now facing an uncertain future. The purposeful integration of non-wire alternatives into the system planning process, as well as the embrace of new technologies that may provide real-time demand side management are both timely and necessary. Regulators will have the opportunity to stress the value of energy efficiency in several upcoming filings, including NYSERDA’s Clean Energy Fund Proposal and the utility ETIPS. It is our hope that New York regulators will continue to lead the country and continue to provide just and reasonable rates to New York ratepayers by recognizing the role of energy efficiency as the least cost energy resource. Keeping these goals in mind, the Commission will have the best chance of fulfilling its promise to reform our energy vision.